Alarm from the markets: broken or on snooze?

Geopolitics is also such a factor. When tensions rise in the world, we notice it almost immediately in the markets. For example, the Swiss franc and the US dollar will rise in value, just like precious metals. Within the euro country, investors are fighting to take shelter in the safe haven called "German government bonds". As a result, German interest rates are tumbling down. However, something strange has been happening lately.

Tensions continue to rise
Although geopolitical tensions have risen considerably in recent months and continue to rise, the dollar has become weaker on balance. And the Swiss franc doesn't exactly steal the show either. The leading German ten-year interest rate has also more than doubled compared to the autumn of last year and from the price of gold you would not be able to deduce that there are quite a few short fuses and potential flashpoints in the world.

What makes the latter even more remarkable is that the major central banks have jointly printed an unprecedented amount of new and unsecured money. The central banks from the eurozone and from Japan, China and the US have created the equivalent of 12.000 trillion dollars (that's 12 with 12 zeros after it) out of thin air in recent years alone. A fraction of that would normally send gold prices into the stratosphere. Instead, black gold has been moving roughly sideways for some time and the record of approximately 1.900 per troy ounce is light years away.

Drop off procedure
The American aircraft carriers that steam towards North Korean waters, the Russian fighter jets that come so close to American airspace that the Americans have to take to the air to chase them away, the Chinese army planes that cut off the American fighters in the air and at about Flying by at a distance of 100 metres, intimidatingly, none of which has yet produced the reaction you would normally expect in the market.

The same applies to one scandal after another that the new American president is causing. The situation is such that there is cautious talk here and there that an impeachment is necessary, or that the procedure to remove the American president must be initiated.

The eurozone is the other example
Another good example is the eurozone. Next year the Italians will elect their new government. At least, that was the expectation until recently. However, reports are coming from Rome that the Italian elections could be held as early as this year, in September. Given that Italy is in serious economic and financial trouble and that many blame Brussels and Berlin rather than Rome, the popularity of the anti-euro parties in the country is considerable.

If Italy goes to the polls, the rest of the eurozone, and the world, will hold its breath: should the anti-euro forces win and take Italy out of the euro, that might be the blow that will destroy the project of a common currency cannot survive in Europe. Or if the currency survives, the consequences for all eurozone countries could be at least temporarily severe.

And yet it is not just the case that the euro is losing value compared to the dollar. The European currency has actually not been that strong against the greenback! While, as mentioned earlier, you would expect a stronger dollar simply because of the geopolitical tensions.

This raises an intriguing, but above all an important question: is this a structural change, as a result of which old maxims and relationships no longer apply? Or is it just a temporary anomaly and will the markets behave "normally" after a while, namely as they have done for centuries in similar circumstances?

Structurally or not?
If there is a structural change, we must be very careful in drawing conclusions about the future movement of interest rates. In a potentially new environment, they certainly do not have to react in the same way as before in a situation of increasing geopolitical tensions.

However, the second explanation may also be correct. That central banks such as the Fed and the ECB, some more than others, are keeping their monetary policy unprecedentedly loose and even expanding it. That also influences the behavior of the markets. That's what economists call "bubbles."

Another view of this is to see that policy as a kind of hostage-taking of the markets. For example, it is very easy to imagine that long-term interest rates will not rise, because demand from central banks has in fact eliminated market forces. That market that economists used to say "speaks" to investors at an early stage. 

Manipulated markets
And then there is something that is now a fact, namely that many markets are manipulated by the big banks. Many fines have been imposed for manipulating the interest rate markets, but also for manipulating the silver and gold market. Manipulation of prices disrupts the early warning signaling effect of the markets.

If the second explanation is correct, and if we combine it with the fact that market forces always win out over manipulation, then that would mean that an abrupt normalization of the markets can be expected sometime in the future. This can be compared to an earthquake, which adjusts 2 tectonic plates after more and more pressure builds up for a long time. On the financial markets, such an earthquake could easily take the form of a sharp decline in the value of the euro and a rapid and sharp increase in interest rates.

Keep an eye on developments
It should be clear: keeping an eye on developments and especially what is happening in the background is not an unnecessary luxury, but a necessity. This is in view of the possible consequences on interest rates and exchange rates.

For the time being, however, the interest rates for all maturities and certainly the EURIBOR rates will remain very low. The latter rates are strongly linked to the ECB interest rate and that interest rate does not seem to be going anywhere this year and next year, if not for a large part of 2019.